Articles Tagged with Dissolution

photo-LLC-law-change-225x300All good things come to an end and that could include a limited liability company or LLC. California law will change in 2017 and make it easier to dissolve and to wind up its affairs. If you’re involved in an LLC and thinking it’s run its course and time to pull the plug, depending on the circumstances, you may want to wait another couple months.

An LLC is a hybrid business entity. It’s a combination of a partnership and corporation.

  • Its main advantage over a partnership is like the shareholders of a corporation the LLC’s owners’ (members’) liability for its debts and obligations is limited to their financial investment.
  • However LLC members can participate in its management and profits or losses flow through to its members like a partnership.
  • An LLC can’t be formed for businesses that provide professional services that require a state professional license, such as a legal or a medical practice.
  • Forming an LLC is easier to form and maintain than a corporation. LLC’s don’t issue stock, are not required to hold annual meetings or keep written minutes, which a corporation must to preserve the liability protection for its owners.
  • Articles of organization must be filed with the state and LLC members must enter into an operating agreement. An oral one will suffice but a formal, written agreement is a better idea for all those involved.
  • An LLC is normally managed by its members, but they can agree to hire a manager to handle its affairs.
  • For state income tax purposes an LLC will be classified as a partnership if there is more than one owner but members can elect to have it taxed as a corporation.

Earlier this year the California legislature made minor language changes to the Revised Uniform Limited  Liability Company Act (RULLCA) and they will go into effect in January. RULLCA currently states that an LLC could be dissolved and its activities wound up if, among other things, a majority of its members voted to dissolve it. Continue reading

2013_04_02__5058When the members decide to dissolve a limited liability company (LLC) in a court proceeding, it is generally the last resort for the aggrieved investors and business owners.  It is an extreme court remedy which is initiated by a lawsuit from a member.  It is often not a preferred outcome, since the members will rarely get market value for their share.  However, it is sometimes the only choice, and the consequences of not filing such a lawsuit could be even worse.

Any member or the manager of an LLC can file a suit in court seeking a decree of dissolution under the circumstances listed below.  These are the grounds for judicial dissolution provided under the California Corporations code §§17005(c), 17351(a), and they cannot be modified or waived in the Article of Incorporation (Article) or Operating Agreement signed by the members.

1.  “It is not reasonably practicable to carry on the business in conformity with the Article or Operating Agreement.”  Corp C §17351(a)(1).

In other words, the economic reasons for forming the LLC and the purpose of operating it are likely to be unreasonably frustrated.  For example, the LLC might have started out manufacturing a product, but due to the changing economy it became more profitable to engage as a service company in product design.  In this example, the LLC’s dissolution can be ordered through a court proceeding.

2.  “Dissolution is reasonably necessary for the protection of the rights or interest of the complaining members.”  Corp C §17351(a)(2).

The term “reasonably necessary” is broad in scope.  Let’s say that you are being unfairly treated by the member who holds a majority of shares of the LLC, and you feel your rights as a minority member are not being honored.  Then under this circumstance, you may ask the court’s assistance to dissolve the LLC.

3.  “The business of the LLC has been abandoned.”  Corp C §17351(a)(3).

In the event that the LLC has stopped conducting business, this provision can be utilized to obtain a formal court dissolution and winding up of the LLC’s business affairs.

4.  “The management of the LLC is deadlocked or subject to internal dissension.”  Corp C §17351(a)(4).

Internal discord is generally the most common reason for the LLC’s members to seek the court’s intervention for dissolution.  This provision merely states that internal dissension or a deadlock must exist, without the need for showing specific details such as dissension resulting in the inability to carry on business as required under judicial dissolution of a corporation.

5.  “Parties in control have been guilty of, or knowingly permitted, persistent and persuasive fraud, mismanagement, or abuse of authority.”  Corp C §17351(a)(5).

Oftentimes, the dysfunction of the members leads to accusations of serious misconduct, mismanagement, fraud, or abuse of authority by members who own the majority share of the LLC Continue reading

IMG_0645When the investors or entrepreneurs set up a limited liability company (LLC) for their business ventures, most of the time they want the endeavor to be successful and lasting. However, there are times when the members will need to dissolve the business affairs of the LLC, either as the result of unforeseeable circumstances or for strategic reasons. The Corporations Code §17350 provides that an LLC shall be dissolved and its affairs wound up after the following events:

1.   At a Time Specified in the Article

During the formation of the LLC, if the investors specify that the LLC will only exist for a definite length of time or if there is a specific date for the termination of the LLC, the LLC may be dissolved when this date has been reached. This is sometimes done when a specific date for terminating an LLC is important to the investor. Before the expiration date, however, the investor can always change or delete this condition from the Article.

2.  Upon an Event Specified in the Article or Operating Agreement

In addition to reaching a specific time for dissolving an LLC, investors can also set a specific event to trigger this, designated either in the Article or the Operating Agreement. For example, the members of the LLC can state that when a specific real estate project is sold, completed, or developed, the LLC will be dissolved. This way, the members can be assured that the LLC they invested in will only serve that particular purpose, and they can always create a new one for a different purpose. This example pertains to real estate transactions. As to the LLC in different segments of business, the condition can be set upon a condition of certain gross sales or net profits being generated for a specific business. Almost any legitimate business purpose can be set as a condition.

3.  By the Majority Vote of the Members

The most obvious method for dissolving an LLC is when the majority of the members vote to dissolve the LLC. This right cannot be waived, and the Operating Agreement cannot withdraw the members’ right to vote on dissolution. However, the Operating Agreement can set a condition for the vote, such as to increase the vote from a majority to unanimity.

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